Property Damage to Non-faulty Work

S.C. Supreme Court reaffirms ruling on “no occurrence”

Home builders in South Carolina are still partially protected under the standard General Liability policy form against the “no occurrence” claim denial strategy used by many insurance carriers to totally deny workmanship claims for both faulty and resulting non faulty work. In a recently released September 8, 2009 ruling by the South Carolina Supreme Court in the Auto Owners vs Newman rehearing, the court affirmed most of its prior decision. However, for reasons stated at the end of this article, the carriers have a different way to deny these claims for most homes built after 2004.

The case involved a builder, Trinity, that constructed a house in 1999 in which construction defect problems (moisture intrusion) arose from the installation of EIFS. Auto Owners Insurance Company sought a declaratory action to determine its rights and obligations. They argued the theory that negligent construction is not an occurrence and thus not covered under the General Liability policy form. They reasoned that the subcontractor’s defective installation of stucco did not cause an accident contributing to an occurrence subject to coverage under the policy.

On this issue, the South Carolina Supreme court rehashed prior case law under L-J and High Country and used the following reasoning to reject Auto Owner’s argument and to strike the no-occurrence claim denial in South Carolina (at least for resulting property damage beyond the defective work itself) :

“The L-J court went on to explain …. a CGL policy may provide coverage where faulty workmanship causes third party bodily injury or damage to other property besides the defective work product.”

“…. the High Country court found that the complaint was not simply a claim for faulty workmanship seeking damages to repair the defective siding itself, but rather, was a claim for negligent construction resulting in damage to other property.”

“In our view, these findings establish that there was ‘property damage’ beyond that of the defective work product itself, and that therefore, the homeowner’s claim is not merely a claim for faulty workmanship typically excluded under a CGL policy.”

“Furthermore, although the subcontractor’s negligent application of the stucco does not on its own constitute an ‘occurrence’ , we find that the continuous moisture intrusion into the home was ‘an unexpected happening or event’ not intended by Trinity – in other words, an ‘accident’ …”

“To interpret ‘occurrence’ as narrowly as Auto Owners……..would render both the ‘your work’ exclusion and the subcontractor’s exception to the ‘your work’ exclusion in the policy meaningless.”

“Accordingly, we hold that the subcontractor’s negligence resulted in an ‘occurrence’ falling within the CGL policy’s initial grant of coverage for the resulting ‘property damage’ to the home’s framing and exterior sheathing.”

Declad/Reclad of Stucco

However, the court reversed its earlier ruling and denied coverage for “…. the replacing and repairing of the defective stucco itself as an incidental cost to repairing the damage to the other property. The court cited the exclusion barring coverage for “….any loss, cost, or expense…for the repair, replacement, adjustment, removal or disposal of…’your product’; …’your work’; or …’impaired property’; if such product , work or property is withdrawn …from use… because of a known or suspected defect, deficiency, inadequacy or dangerous condition in it.” In citing this exclusion, the court reasoned that its application is consistent with the court’s acknowledgement that “a claim solely for economic losses resulting from faulty workmanship is part of an insured’s contractual liability which a CGL policy is not intended to cover.”

In My Opinion

Even though this is a partially positive ruling for builders that use subs, the Supreme Court is faulty in its own analysis and should have ruled that the standard CGL policy form covers property damage to the faulty work itself in addition to resulting damage to the non-faulty work. Such a ruling to cover the faulty work itself would have upheld the true intent of the General Liability policy form as evidenced by the “subcontractor exception” to the “damage to your work” exclusion. Even the most basic insurance courses (Certified Insurance Counselor) taught to insurance agents will illustrate this concept with on-point examples about how it is the intent of the policy for coverage to extend to the faulty work itself.

As concerns its ruling on the denial of coverage for the EIFS declad/reclad, a number of carriers in South Carolina probably wish that this ruling had occurred years earlier before they paid out tens of millions of dollars in claims for this exposure. Also, it appears that the court may have misapplied the “Recall Of Products, Work, Or Impaired Property” exclusion that was cited as the sole reason for denying the declad / reclad of the stucco. According to Scott Turner in Insurance Coverage Of Construction Disputes, this exclusion is limited to recalls of products or work for preventative purposes and does not apply to claims involving actual property damage to the product or work that has already failed.

The carriers that write General Liability policies for builders will not like the overall tone of this decision; however, all they have to do to escape liability for construction defect is to use “Exclusion: Damage To Your Work Performed By Subcontractors On Your Behalf (CG2294)”. As a matter of fact, most carriers that write General Liability for builders have used this exclusion or a similar version since 2004. Therefore, the partially favorable supreme court ruling will mean little for the average builder.